United Nations Brownbag Lunch, Port Moresby 28 April 2016 · The PNG economy: is a crisis...

United Nations Brownbag Lunch, Port Moresby28 April 2016

Michael Cornish

The PNG economy: is a crisis inevitable?

The PNG economy: is a crisis inevitable? Michael Cornish

Overview

• The PNG economy: a quick introduction

• Fiscal policy

– Solutions?

Slide 1

– Solutions?

• Monetary policy

– Solutions?

• Conclusions for development partners


The PNG economy: a quick introduction

• Commodity-based economy

– Agricultural exports provide reasonable

amounts of local employment, but fuels

Slide 2

and mineral commodity exports do not

• PNG’s share of total global exports: 0.03%

PNG is also a high cost economy


Groceries POM price

Dilmah 25 bags 50g Ceylon tea 544%

Cadbury roses silver - 225g 241%

Cadbury dairy milk choc - 200g 219%

Zafarelli spaghetti - 500g 205%

Fruit loops - 285g 200%

Napolitana pasta sauce - 500g 199%

Eggs - 650g 198%

Arnotts milk arrowroot - 250g 198%

Saxa iodised table salt - 750g 166%

Vegetables POM price

Broccoli 554%

Lettuce 388%

Red onion 335%

Oranges 334%

Grape tomato 287%

Green capsicum 273%

Granny smith 200%

Red delicious apple 175%

Comparing POM prices to Canberra prices

Slide 3

Saxa iodised table salt - 750g 166%

White sugar - 1kg 165%

Lowan Apple Cinnamon Oats -750g 154%

Weet-Bix - 375g 128%

Pringles original - 169g 109%

Heinz baked beans - 420g 102%

Coke - 2L 93%

Bushells blue label 25 bags 50g 54%

Mi goreng - 85g 23%

Red delicious apple 175%

Button mushroom 154%

Capsicum (all varieties) 125%

Brown onion 117%

Potato 111%

Cucumber 86%

Eggplant 35%

Banana 29%

Source: Rohan Fox, ANU, August 2015



• Major merchandise exports (goods):

– 23.8% agriculture

– 41% fuels and mining

Slide 4

– 41% fuels and mining

– 6.2% manufacturing

– 29% other Source: WTO, 2014



• Major merchandise imports (goods):

– 11.4% agriculture

– 17.8% fuels and mining

Slide 5

– 17.8% fuels and mining

– 69.4% manufacturing

– 1.4% other Source: WTO, 2014


10

15

Real GDP growth [and projections] (%)

Bank of PNG / Treasury

ADB

World Bank

Slide 60

5

2012 2013 2014 2015 2016p 2017p 2018p 2019p



• In resource-dependent economies, GDP

can be a misleading indicator of welfare

– E.g., Most of the LNG project is owned

Slide 7

offshore, so a significant proportion of its

revenue will be of no benefit to PNG

• A better measure?

– Gross National Income (GNI)


Slide 8


Slide 9


12

14

16

18

20

Japanese LNG contract prices (USD/mmbtu)

Slide 10

8.5

0

2

4

6

8

10


Slide 11


Slide 12Source: Paul Flanagan, ‘Pathways from

potential crisis’, ANU


Fiscal policy: where are we now?

• Collapse in government revenues of 20%

(relative to the 2015 budget)

• Expenditure reductions in 2015 (against

Slide 19

budget):

– 37% cut in health

– 36% cut in infrastructure

– 30% cut in education


Slide 20

Source: 2015 Final Budget Outcome document, Government of

PNG; and Paul Flanagan, PNG’s frightening Final Budget Outcome,

Australian National University



• Note: these are areas the government

said would be protected

• The combined budget deficits over the last

Slide 21

three years are 24% of GDP

– The largest deficits over a three year

period in PNG’s history!



• Despite the cuts, government is starting

to run out of money

Slide 22

– Problems already emerging in the

payment of subcontractors and some

public servants


Fiscal policy: what can they do?

• Cut more government expenditure

• Sell government assets

• Seek domestic finance

– Insufficient domestic appetite

Slide 23

– Insufficient domestic appetite

• Seek international finance

– Sovereign bond issue? Failed

– Chinese loan? Unlikely

– IMF loan? More and more likely


Fiscal policy: what are they doing?

Short-term measures:

• Deferring and delaying expenditure,

especially with government suppliers and

Slide 24

subcontractors

• Seeking bigger dividends from SOEs

– Unconfirmed reports that SOEs are now

borrowing from BSP


PGK v. USD June 2014 intervention and appreciation

Slide 25


Monetary policy: what can they do?

• Since June 2014, the Kina ceased to be a

floating exchange rate

Slide 26

– IMF’s description: ‘a de facto crawling peg’

• As a result, the Kina has been overvalued

ever since


Slide 27


100

120

140

160

Real exchange rate (2005=100)

Slide 280

20

40

60

80

2005 2010 2011 2012 2013 2014


Monetary policy

• An overvalued exchange rate is:

– Good for importers

– Bad for exporters

Slide 29

– Bad for exporters

• This overvaluation has created an ever-

increasing shortage of FOREX in PNG

• The government has addressed the

shortage with FOREX rationing


Monetary policy

• Lack of FOREX has been slowly strangling the

formal private sector in PNG

– Hard for companies to pay foreign suppliers

Slide 30

– Currently the top concern with PNG

business leaders [ANZ Business Survey]

• Business activity has been in year-on-year

decline since the first quarter of 2015


Monetary policy: what are they doing?

• Government is seeking a USD 250 million

loan from the International Finance

Corporation (IFC) for the commercial

Slide 31

Corporation (IFC) for the commercial

banks, to help them clear the backlog

– But estimated backlog is much bigger;

PGK 3bn (USD approx. 950 million)


Monetary policy: what can they do?

• Ultimately the exchange rate must be

devalued to clear the market

Slide 32

– BUT they must be careful – urban poor

need time to respond to increased price

of imported rice


Conclusions for development partners

Very tough times ahead

• Massive government budget cuts already

Slide 33

underway

• Government partners will have less

project funding capacity




• Education, health, and infrastructure

have faced very big government

Slide 34

spending cuts already

• Other sectors have fared better thus far,

but have still faced large government

spending cuts




• Potential cuts in public servant numbers?

• Exporters will benefit over time as

Slide 35

• Exporters will benefit over time as

exchange rate devalues

• But urban poor will face increasing

pressures as the cost of rice increases

United Nations Brownbag Lunch, Port Moresby 28 April 2016 · The PNG economy: is a crisis...

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